I lived and worked in Shanghai and Hong Kong for almost two decades and now write primarily on China, Asia, and nuclear proliferation. I am the author of two Random House books, The Coming Collapse of China and Nuclear Showdown: North Korea Takes On the World. My writings have appeared in The New York Times, The Wall Street Journal, Barron’s, Commentary, and The Weekly Standard, among other publications. I blog at World Affairs Journal. I have given briefings in Washington and other capitals and have appeared on CNN, Fox News, MSNBC, Fox Business, Bloomberg, CNBC, and PBS. I served two terms as a trustee of Cornell University.

Sun Sets on China's Solar Industry

On Friday, shares of Trina Solar closed at $4.62, down $0.18 for the day. The stock has been falling for a long time, declining more than 85% in the last three years. That’s not bad, however, considering Trina is a Chinese solar company. Rival Suntech Power has seen its shares, also listed on the Big Board, drop. They are at about 2% of their 2007 values. And Yingli Green Energy plunged 7.3% on Friday in New York, and it is now trading close to its five-year low.

In last two years, shares of Chinese solar cell producers have fallen by about half, and more price declines are on the way. The prospects for these manufacturers are poor.

More important, the seemingly intractable problems of the sector highlight the limits—and impending failure—of the country’s industrial policy. It’s not that Chinese technocrats did not accomplish their ambitious goals. They set out to create an industry that would dominate the world, and they succeeded. They aided solar cell manufacturers with easy credit from state banks—perhaps as much as $18 billion of cheap loans—and, some say, subsidies. As a result of central and local government support, Chinese manufacturers began to expand rapidly. Chinese competitors now own 70% of the world’s wafer-producing capacity.

Make that overcapacity. “Massive subsidies and state intervention have stimulated overcapacity more than 20 times total Chinese consumption and close to double total global demand,” said Milan Nitzschke, president of EU ProSun, in a statement released late last month. The company alleges that 90% of Chinese production had to be exported and that Beijing used subsidies to keep its manufacturers in business.

EU ProSun, a subsidiary of SolarWorld of Germany, has filed a complaint with the European Commission alleging China’s subsidies were illegal. The Commission is already investigating charges that Chinese producers have been dumping production in Europe. In July, ProSun filed an anti-dumping complaint with the Commission. European solar panel makers say Chinese companies have been selling at 80% below their cost.

Chinese producers are clearly worried about the investigations in Brussels. Europe, the world’s largest solar market, accounted for $27 billion of their sales last year. That was about a third of their production and 7% of all Chinese exports to the European Union.

The U.S., on the other hand, takes around 7% of China solar exports, and what is left of the American industry is filing trade actions against Chinese producers as well.

U.S. manufacturers, led by SolarWorld, have already won preliminary relief. An initial Commerce Department decision in May of this year imposed countervailing duties of between 2.90% to 4.73%, to make up for Chinese subsidies, and anti-dumping duties of about 31%. On Wednesday, Commerce issues its final decision, and producers are hoping those tariffs will be increased.

The International Trade Commission is expected to make its announcement in November. Last year, the Commission voted 6-0 in favor of American producers. Just about no analyst expects a reversal.

Chinese producers are already bracing for the imposition of stiff penalties on both sides of the Atlantic. As a first step, they are using components manufactured elsewhere. That maneuver technically avoids the U.S. duties, at least for the moment. U.S. manufacturers want the Commerce Department to broaden the tariffs to cover this stratagem.

In any event, Chinese manufacturers know they will have to come up with more permanent solutions to avoid crippling trade penalties. Their latest tactic is to buy European competitors. Guangdong Aiko Solar Energy this summer purchased Scheuten Solar of the Netherlands, and Hanwha SolarOne Co. recently announced plans to acquire Germany’s Q-Cells, a move Hanwha said was designed to avoid European trade sanctions.

The only problem is that locating manufacturing to Europe won’t work due to the high costs—40% higher than China. There are, of course, alternatives. China Sunenergy Co. said it would move panel assembly lines to Turkey this year, and analysts expect Chinese companies will shift production to Thailand, India, and Sri Lanka as well as Taiwan. Yet costs of production will still rise for Chinese producers. In Taiwan, for instance, costs are still 15% above those across the strait in China.

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